Analysis: Will Egypt be affected economically by the conflict between Israel and Hamas?

If the conflict between Israel and Hamas that began on October 7, 2023 has not led to a real deterioration of Egypt's security situation at this stage, it constitutes a new external shock on an Egyptian economy that is temporarily degraded and structurally fragile. Egypt is already suffering from the slowdown in Israel's economic activity (gas exports) and tourist flows to the region, valuable sources of foreign exchange.

Egypt’s economic activity remains marginally affected, due to the absence of any real deterioration in the national security situation since the outbreak of the conflict.

The terrain of confrontation between Israel and Hamas is very far from the Egyptian population concentrated on 7% of the territory around the Nile. If the increased mobilization of the police services and the army must be underlined, the impact of the conflict on public finances would be significantly more marked in the event of the involvement of the Egyptian army in the conflict or the reception of refugees while the government’s budgetary room for maneuver remains limited (public debt would reach 91.3% of GDP and debt service accounts for 73.2% of tax revenue).

Any disruption to regional supply chains could also reinforce inflationary pressures (32.4% expected in 2023/24) and on external accounts (Suez Canal revenues amount to USD 8.8 billion in 2022/23, up 25.2% y/y).

The impact of the conflict on the tourism industry is confirmed as the winter season constitutes the peak of activity in Egypt and the sector constitutes one of the main sources of foreign currency entry for the country (13.6 billion USD in 2022/23, +26.8% y/y).

Israel has called on its nationals to leave Egypt twice since the start of the conflict (the number of Israeli nationals traveling to Egypt each year is estimated at 600,000). If tourists currently in Egypt have not decided to leave the country prematurely and cancellations of short-term tourist stays remain limited (in the absence of a deterioration in the security situation, the general conditions of sale apply with significant cancellation fees for customers), tour operators are however reporting a slowdown in the pace of sales from mid-October.

Thus, according to Reuters – referring to data consolidated by ForwardKeys – plane ticket reservations to Egypt have fallen by 26% year-on-year since the start of the conflict (compared to -49% in Jordan and -74% in Liban).

The suspension of the exploitation of Israeli gas from Tamar by Chevron and the closure of direct gas pipelines to Egypt would have halved Egyptian imports of Israeli gas (870 M FT3/day on average over the first eight months of 2023), even though Egypt has been going through an electricity crisis since this summer linked to a deficit in local gas production.

Record LNG exports from Egypt (USD 8.4 billion in 2022), already slowed by the fall in prices and tensions on local supplies, could be considerably reduced if the conflict continues.

Finally, on the capital markets, the conflict reinforces the confidence deficit of foreign investors (net outflow of portfolio investments of USD 24.7 billion over the last two fiscal years). Beyond the sole risk of regional propagation of the conflict which would weigh on economic activity and the State budget, its possible stagnation carries the risk of a delay in the implementation of structural reforms.

Source: French Embassy in Egypt